Speaker 1: we're talking about the five things you need to know about.
Speaker 1: One of the most watched events on the chinese political calendar.
Speaker 1: China's National congress is held every five years and it's
Speaker 1: coming up mid october. I'm sonar a mess from the
Speaker 1: money mine team. My guests victor Shiff, associate professor of
Speaker 1: political science at the University of California san Diego
Speaker 1: and Rory Green, head of china and Asia Research at T. S. Lombard.
Speaker 1: That's a macroeconomic forecasting consultancy victor. Let's start off with,
Speaker 1: why is this year's meeting so important And what clues
Speaker 1: should investors be looking out for
Speaker 2: Once every five years? The party congressional delegates who are
Speaker 2: 2200 of the most senior officials in China will convene
Speaker 2: to
Speaker 2: and they elect a new slate of central committee members.
Speaker 2: And the Central committee is a little bit like the
Speaker 2: Congress of the Parliament. These are 200 of the most
Speaker 2: senior officials in china. But then the Central committee in
Speaker 2: turn will immediately elect the new politburo, the new politburo
Speaker 2: standing committee as well as elect or re elect
Speaker 2: in this case, the new secretary general of the Chinese
Speaker 2: Communist Party, the most important officials in the Chinese Communist Party.
Speaker 2: Therefore the most important officials in china will be elected
Speaker 2: or is selected. Some would say at this Congress and
Speaker 2: also a new set of agendas for the next five
Speaker 2: years will be announced in the political work report, which
Speaker 2: will be read out loud.
Speaker 2: She Jinping himself.
Speaker 1: Yes, a lot of important signals, particularly around the economy
Speaker 1: that will come out at the 20th party Congress. More
Speaker 1: important for the longer term. Less. So the short term.
Speaker 1: And really, I think there's going to be strong signals
Speaker 1: from the party Congress around changes to the constitution. Party
Speaker 1: Congress work report and the personnel governing the economy particularly
Speaker 1: And all these shifts will basically confirm the sides. We've
Speaker 1: seen that common prosperity more status. Government intervention is going
Speaker 1: to be the key for China's emerging growth model, particularly
Speaker 1: around the personnel, li Keqiang, the premier lieu, the top
Speaker 1: guy on the economy in china, both likely to step down.
Speaker 1: So it is a real key change here around the
Speaker 1: party constitution,
Speaker 1: the political economic framework and the people that are actually
Speaker 1: implementing these policies. It could be a very big shift here.
Speaker 1: The main change in the party constitution is to, we think,
Speaker 1: to have xi Jinping thought added to the constitution and
Speaker 1: this would elevate she to the same level as Mao
Speaker 1: Zedong and the only other party leader to ever have
Speaker 1: that accolade and really move into almost an unassailable position.
Speaker 1: He's already in an incredibly strong, powerful position. But this
Speaker 1: putting him level with Mao in his own lifetime, would
Speaker 1: be an extremely powerful move guarantee his
Speaker 1: continued leadership and through that flows his continued input into
Speaker 1: political economy and china's growth model.
Speaker 2: Do you
Speaker 1: think the Congress will be an inflection point if you
Speaker 1: will
Speaker 2: for key
Speaker 1: policies in china in particular for Covid zero
Speaker 2: until early this year. There has not been a lot
Speaker 2: of economic pain in china. So china control Covid pretty successfully.
Speaker 2: In 2020 2021 when the whole world had to speak
Speaker 2: covid pandemic.
Speaker 2: So the service sector did fairly well. But more importantly
Speaker 2: in 2020, Chinese exports grew tremendously because Chinese factories were
Speaker 2: still open and operating at a time when many factories
Speaker 2: around the world were shut down. So China became a
Speaker 2: main exporter of PPE. S, but also consumer electronics, clothing, etc.
Speaker 2: This year, the economic challenges is greater. But because export
Speaker 2: is still doing very well, the leadership may feel that
Speaker 2: it can continue with pretty stringent zero covid policies and
Speaker 2: not suffer too much economic repercussions. But of course if
Speaker 2: export were to worsen a lot more from today's level,
Speaker 2: they may have to reassess their approach.
Speaker 1: I think there are two. He breaks on removing zero
Speaker 1: covid policy in china. The first is political and the
Speaker 1: second healthcare. So after the Congress that does make it
Speaker 1: easy on the political side, I think we will start
Speaker 1: to see the propaganda and the state media messaging around
Speaker 1: zero Covid start to change and become a little bit softer.
Speaker 1: But the health care is the main barrier, the vaccination
Speaker 1: rate
Speaker 1: needs to come up much higher. This china CDC says
Speaker 1: they need to get through a very difficult winter flu
Speaker 1: season stocking up on medical equipment and supplies for us.
Speaker 1: We think it takes until Q 2 2023 Q two
Speaker 1: of next year for a more substantial easing of covid
Speaker 1: 19 policies and once the party congress is out of
Speaker 1: the way, it'll be health care rather than politics, which
Speaker 1: is the main block on opening up.
Speaker 1: There are a couple of headwinds that we perhaps we
Speaker 1: get onto. We call them the three Ds debt, demographics
Speaker 1: and de globalization and longer term these three structural headwinds
Speaker 1: will weigh on china's growth. But near time it's all
Speaker 1: about Covid
Speaker 2: looking
Speaker 1: further ahead the first of those deeds, you talked about
Speaker 2: debt. Do
Speaker 1: We have any clues on how the country might tackle
Speaker 1: the property crisis? It's a massive risk. It's 70% of
Speaker 1: household wealth, key source of revenue for local governments. Banks,
Speaker 1: collateral banks, assets are heavily weighted to property. So it
Speaker 1: is a major risk. A global financial crisis. Lehman moment
Speaker 1: is always very unlikely in china because the government controls
Speaker 1: the banks, controls most of the Corporates and with capital controls,
Speaker 1: keeps all the household savings in the economy so money
Speaker 1: can be shifted around. But to actually get things around
Speaker 1: to generate growth, we really need to see improvement in confidence,
Speaker 1: particularly around presales
Speaker 1: pre sales of this. This model where an uncompleted apartment
Speaker 1: can be sold for full value and that's the dominant
Speaker 1: sales model in china and it worked very well when
Speaker 1: prices were rising and developers could sell more of these
Speaker 1: to use the money to complete the older pre sold units,
Speaker 1: but now prices are falling and no one trusts the
Speaker 1: developers and the model is breaking down
Speaker 1: and the only way you can restore that model is
Speaker 1: greater confidence in the economy and the developers to deliver
Speaker 1: these units. So Beijing could do a lot around this issue,
Speaker 1: It would need quite a bit of liquidity injected into
Speaker 1: these developers the banks, but the money is certainly that
Speaker 1: it's certainly doable. And it's a choice from Beijing that
Speaker 1: they don't want to Baxter
Speaker 1: The entire sector. They don't want to let moral hazard
Speaker 1: creep back in and give the developers a free ride.
Speaker 1: So they're trying to do enough to keep the sector alive,
Speaker 1: but not too much to kick off another round of speculation,
Speaker 1: but I think they will have to do more to
Speaker 1: keep the sector going until they can remove the COVID-19 restrictions.
Speaker 2: The real estate sector, some would say has been in
Speaker 2: a bubble territory for the past 10 years. Uh And
Speaker 2: I sort of feel that myself, but nonetheless, you know,
Speaker 2: the real estate sector kept growing, kept being able to
Speaker 2: refinance a lot of the debt from the banking sector
Speaker 2: in 2020 very draconian de leveraging policies for the real
Speaker 2: estate sector was implemented. The so called three red lines
Speaker 2: that curtailed property developers ability to borrow
Speaker 2: even more money from the banks to finance the next project.
Speaker 2: Suddenly the whole bubble began to deflate very rapidly and
Speaker 2: real estate investment was still down sort of 2030% compared
Speaker 2: to last year. And that is a major headwind to
Speaker 2: the economy. I think they're trying to turn that part around,
Speaker 2: even if they don't turn around zero covid, they are
Speaker 2: definitely turning around the de leveraging policy for the real
Speaker 2: estate sector.
Speaker 1: So this is what we can expect from China's 20th
Speaker 1: National Congress, the election of the most important officials, President
Speaker 1: Xi Jinping appears all set for an unprecedented third term
Speaker 1: in power. But who else is staying and who's leaving? Secondly,
Speaker 1: the meeting sets China's agenda for the next five years.
Speaker 1: So will those stringent zero covid policies continue,
Speaker 1: analysts are also looking for changes in the constitution and
Speaker 1: any signals that the common prosperity policy as well as
Speaker 1: government intervention, are going to be key for China's new
Speaker 1: emerging growth model. Now, that's in the face of longer
Speaker 1: term challenges the so called three D's debt, demographics and
Speaker 1: de globalization.
Speaker 1: So victor tell us, what do all these headwinds mean
Speaker 1: for China's economic growth target is at all feasible this
Speaker 1: time around
Speaker 2: In the short term. I think that the central government
Speaker 2: is gonna unleash a whole series of measures to try
Speaker 2: to convince the world at least that it has reached
Speaker 2: its growth target for 2022. Most independent analysts will say
Speaker 2: that there's no way China can reach this 5.5% growth
Speaker 2: rate
Speaker 2: By the end of this year. But I think we
Speaker 2: will see maybe a little bit more of this additional
Speaker 2: stimulus after the party. Congress which plausibly can give them
Speaker 2: some excuse to say no. Actually we still came very close,
Speaker 2: you know, 5% growth, something like that, potentially the leadership
Speaker 2: change is going to introduce new leaders, a new premier
Speaker 2: of China, a new executive, vice premier of China who
Speaker 2: maybe
Speaker 2: A lot more friendly to dovish monetary policy, less prudential
Speaker 2: regulations over the real estate sector. This in the short
Speaker 2: term will be bullish for growth. But as an economy
Speaker 2: that already is saddled with 300% of GDP worth of debt,
Speaker 2: any short term stimulus is going to result in higher
Speaker 2: debt level down the road. And again, the big
Speaker 2: is that we now live in a high interest environment.
Speaker 2: The interest payment could be quite onerous for all the
Speaker 2: different entities in china. It will be quite challenging for growth,
Speaker 2: maybe not in the next three or four months, but
Speaker 2: a lot of these growth concern will come back. So
Speaker 2: if there's a mini stimulus the next three or four months,
Speaker 2: that's great. But then a year later there's still going
Speaker 2: to be these growth concerns because of high debt
Speaker 1: chinese leaders have talked about common prosperity as a key
Speaker 1: strategic goal, Do you expect it to change the way
Speaker 1: china is run
Speaker 1: common prosperity is clearly very important and at the forefront
Speaker 1: of Xi's mind and the emerging ideology that will be
Speaker 1: confirmed at the party congress, but it's not very well
Speaker 1: defined at all. It's still very nebulous uncertain concept to
Speaker 1: sort of try and characterize it very, very simply, it
Speaker 1: is a focus on slower, more sustainable, more equitable growth
Speaker 1: with a much greater role for the state in the economy.
Speaker 1: So this could mean some quite positive structural reforms around
Speaker 1: the chinese welfare system. Labor mobility. On the flip side,
Speaker 1: it will see more of the regulatory crackdown that we
Speaker 1: have seen in the past, where areas that are unaligned
Speaker 1: with the common prosperity agenda like property sector, big rent
Speaker 1: seeking tech companies will be hit very hard from from
Speaker 1: the state.
Speaker 1: So it's slower, more sustainable growth, trying to boost the
Speaker 1: middle class, trying to boost incomes and shift away from
Speaker 1: this kind of debt-driven property model that has dominated China
Speaker 1: the past 5 to 10 years.
Speaker 2: Yeah, potentially it can be formalized and common prosperity, the
Speaker 2: manifestation of it has been kind of forced taxation from
Speaker 2: the billionaires, but the problem with common prosperity is that
Speaker 2: it's really not redistribution, right? So the money that has
Speaker 2: been donated by billionaires by and large has gone to
Speaker 2: the chinese government and chinese government by and large has
Speaker 2: not redistributed to actually poor households, there was kind of
Speaker 2: an anti poverty drive a few years ago which read
Speaker 2: just read some resources to poor households in rural areas,
Speaker 2: but the common prosperity mainly just resulted in more money
Speaker 2: going to the chinese government coffer. So that doesn't stimulate
Speaker 2: demand too much at the household level. What china needs
Speaker 2: actually is, if it's going to get into more debt,
Speaker 2: it has to be a demand side kind of stimulus program.
Speaker 2: China is the second largest economy of the world, but
Speaker 2: it can afford to give hundreds of dollars to ordinary people,
Speaker 2: really stimulate demand and
Speaker 2: that will be quite a boost to the economy and
Speaker 2: we'll get some of these troubled sectors like the service
Speaker 2: sector going again. But despite a lot of discussion among
Speaker 2: the experts in china on this kind of policy, the
Speaker 2: government continues to reject a demand side. Stimulus instead prefers
Speaker 2: a supply size stimulus, more infrastructure, more subsidies to the
Speaker 2: tech sector. But then that ends up exporting deflation the
Speaker 2: rest of the world, which
Speaker 2: of course the world needs it. We live in high
Speaker 2: inflation era, we do need a deflation from china. But
Speaker 2: in the medium term, that really doesn't help the world economy,
Speaker 2: how the world can benefit even more from china is
Speaker 2: if the 1.3 billion chinese consumers can become wealthy and
Speaker 2: prosperous and they can spend on goods and services produced
Speaker 2: in the rest of the world, we haven't seen hardly
Speaker 2: any of it because of the covid lockdown and because
Speaker 2: wages have not grown very much in china,
Speaker 1: I think she didn't think actually recognizes that these are
Speaker 1: really big problems for china and this is why in
Speaker 1: some respects we're getting this common prosperity policy coming through?
Speaker 1: I think she didn't think knows that the growth model
Speaker 1: has to change cannot keep relying on debt and exports
Speaker 1: to a lesser degree to drive growth. He has realized
Speaker 1: that some of the external depend
Speaker 1: is that china has and this is why we have
Speaker 1: the dual circulation policy and a shift to rely more
Speaker 1: on china internally. The realization that de globalization and certainly
Speaker 1: demographics as well, that is a big part of common prosperity,
Speaker 1: so boosting the growth rate so that there is a
Speaker 1: realization among the top leadership that china faces these very
Speaker 1: difficult headwinds.
Speaker 1: And I think common prosperity is an attempt to shift
Speaker 1: the political economic model to shift the growth model and
Speaker 1: also to change the source of the party's legitimacy for
Speaker 1: rule for governance. You can no longer rely on high growth,
Speaker 1: high debt, rising property prices. The model there also has
Speaker 1: to change that china is going to be slower, more
Speaker 1: vulnerable to certain areas. So there needs to be a
Speaker 1: shift both in the growth model but also where the
Speaker 1: party too.
Speaker 1: Its legitimacy for rule. Common prosperity is an attempt to
Speaker 1: do both of these things changed a bit the growth
Speaker 1: model and change the source of part legitimacy as well.
Speaker 1: There will be clues at the party congress of how
Speaker 1: they're going to attempt to do this very difficult task.
Speaker 1: But they are aware of the challenges. The rise of
Speaker 1: china has been this big story of the past few decades.
Speaker 1: What does it mean now if you're starting a new
Speaker 1: chapter where slower growth is going to be the new normal,
Speaker 2: the Congress party understands that growth naturally slows down as
Speaker 2: an economy gets wealthier and wealthier. But for Xi Jinping
Speaker 2: he needs growth to be at a certain pace because
Speaker 2: the ultimate objective is to catch up with the United
Speaker 2: States in terms of nominal GDP, which of course most
Speaker 2: economists will tell you is kind of meaningless. Nonetheless, I
Speaker 2: think for china this would be a very important milestone.
Speaker 2: The leadership has talked about this
Speaker 2: since the 19 fifties. It's like the great leap forward
Speaker 2: in 1958 1959 was all about surpassing Britain and also
Speaker 2: catching up with the United States and this has been
Speaker 2: the policy objective of generations and generations of chinese leadership.
Speaker 2: And for Xi Jinping this is no different. So this
Speaker 2: is why I think by statistical manipulation china will have
Speaker 2: a decent growth rate officially this year actually for almost
Speaker 2: for certain
Speaker 2: Only the US is going to pull ahead, China is
Speaker 2: going to fall behind a little bit. But for the
Speaker 2: next few years as China seeks to catch up with
Speaker 2: the United States in the next 10 years or so.
Speaker 2: It has to maintain GDP growth. I think the numbers
Speaker 2: at least 3.5% to have a hope of catching up
Speaker 2: with the US despite all of these headwinds, the technocrats
Speaker 2: have to come up with some way to achieve this growth.
Speaker 1: We do normally in a couple of
Speaker 1: areas and new normal in terms of the growth rate
Speaker 1: is going to be slower due to the three Ds.
Speaker 1: I talked about debt, demographics, de globalization that is structural.
Speaker 1: There will be periods of high growth around that cyclically
Speaker 1: but longer term china is slowing. The second factor, which
Speaker 1: I think people are already adjusting quite quickly and partly
Speaker 1: thanks to Washington, what was led by trump but has
Speaker 1: been taken up by both
Speaker 1: sides of politics in the US is a more assertive
Speaker 1: china and china that is looking to not cut ties
Speaker 1: with the rest of the world as such, but to
Speaker 1: insulate the economy, the political system from outside levers of
Speaker 1: control and this is across finance, across tech across commodity
Speaker 1: supply chains. So china would very much like to trade
Speaker 1: more with the rest of the world, wants to export more.
Speaker 1: But in terms of the imports and particularly around key
Speaker 1: choke points, there's a very strong push to to try
Speaker 1: and cut dependence with the rest of the world. That
Speaker 1: does seem to be making headway across c suites around
Speaker 1: the globe and in key capitals, that trend is just
Speaker 1: getting started to be a long rumbling grind. People adjusting
Speaker 1: to a newer model in china and a new model
Speaker 1: in the
Speaker 1: The world as well as globalization comes out of favor
Speaker 1: to a certain degree. All of this isn't just important
Speaker 1: inside China, it's going to have an impact on the
Speaker 1: rest of Asia and the world. Do you think it
Speaker 1: will change the way investors and businesses look at China?
Speaker 1: That's a bit harder to gauge. China initially was the
Speaker 1: clear winner from the pandemic from 2020 until probably October
Speaker 1: November last year. China was boo
Speaker 1: exports booming money flowing into its bond market flowing into
Speaker 1: the equity market from foreigners. But now it shifted and
Speaker 1: in line with some of the common prosperity and then
Speaker 1: the tech regulatory crackdown, there has been a change in
Speaker 1: view on china and investors are certainly wary of putting
Speaker 1: their money into china, both chinese financial assets and sort
Speaker 1: of longer term fixed asset investment F. D. I. I
Speaker 1: do think
Speaker 1: The flows into China will return after growth picks up
Speaker 1: in COVID-19 fade away. But the caution that investors have
Speaker 1: gained around the tech crackdown around geopolitics of Ukraine and
Speaker 1: Taiwan and the more clearly authoritarian model that that is
Speaker 1: becoming evident will remain so the flows will come back
Speaker 1: but there will be caution and probably the level the
Speaker 1: pace of inflows will be less than we've seen in
Speaker 1: the past.
Speaker 1: So what will china due to meet its 5.5% growth
Speaker 1: target for the year. World zero Covid policies continue. And
Speaker 1: how will china deal with longer term challenges, so called
Speaker 1: three days of debt, demographics and de globalization. All eyes
Speaker 1: on these possible inflection points. As china's top leaders meet
Speaker 1: for their milestone National Congress.
Speaker 1: We'll be looking for more clarity on the common prosperity
Speaker 1: policy and how this will change the economic direction of china.
Speaker 1: It's likely to mean slower but also most sustainable and
Speaker 1: equitable growth.
Speaker 1: Now, how it's achieved will be closely linked to the
Speaker 1: political legitimacy of the chinese Communist Party presidency appears all
Speaker 1: set for an unprecedented third term in power. But who
Speaker 1: else is staying and who's leaving?
Speaker 1: That's five things to look out for at china's 20th
Speaker 1: National Congress. Thanks to my guests victor shih, associate professor
Speaker 1: of political science at the University of California san Diego
Speaker 1: and Rory Green head of china and asia research at T. S.
Speaker 1: Lombard money Mind as every saturday at 10 30 PM
Speaker 1: on mediacorp C N A. Can also catch us online
Speaker 1: at CNN dot asia and on youtube.